Senate Ethanol Vote Signals Ill Wind for Other Energy Subsidies

June 17 (Bloomberg) -- The U.S. Senate’s vote to eliminate
a tax credit and a tariff that subsidize ethanol production has
lawmakers wondering which subsidies may be the next ones
targeted.

The ethanol tax credit and tariff won’t end immediately,
because the vote yesterday attached the repeal proposal to
legislation that isn’t likely to become law. The ethanol tax
credit is expected to cost $4.9 billion this year in forgone
revenue, according to the congressional Joint Committee on
Taxation.

Still, lawmakers said the 73-27 vote to end the aid to
ethanol sent a message that no tax benefit will be spared from
an intense search for revenue.

Senator Charles Grassley, an Iowa Republican and a staunch
defender of ethanol and wind tax benefits, said the vote would
encourage lawmakers to zero in on other energy tax breaks.

“Before the year’s out, you’re probably going to have
people attack wind and solar and biomass and biodiesel,” he
said in an interview.

Financial markets paid close attention to the vote. Corn
futures for December delivery slid 2 percent to $6.53 a bushel
in Chicago, after touching $6.50, the lowest for the most-active
contract since March 17. The market closed before the Senate
vote concluded.

Market Reaction

The price decline occurred on misguided speculation that
the Senate action would reduce demand for the grain to make the
fuel, said Glenn Hollander, a partner at Chicago-based Hollander
& Feurehaken, a cash grain merchandiser and broker.

Cash corn prices have fallen 11 percent in Chicago from a
record $7.88 on June 10, government data show.

Tyson Foods Inc., the largest U.S. poultry producer, rose
2.8 percent to $18.08 as of 4 p.m. in New York yesterday.
Smithfield Foods Inc., the world’s largest pork processor,
jumped 6.4 percent to $21.70. Its biggest one-day increase since
2010 came as Smithfield reported its first annual profit in
three years.

“This is a fairly unique situation,” she told reporters
after the vote. “Corn ethanol now has occupied so much of the
market -- 39 percent of the market -- that it’s really impacting
feed costs and that’s what was driving some of the vote for our
amendment.”

Reviewing Tax Breaks

Other Democrats are pressing for a review of energy tax
breaks as part of deficit reduction discussions. Democratic
Senator Robert Menendez of New Jersey and Representative Chris
Van Hollen, a Maryland Democrat, said they hope lawmakers will
revisit tax breaks for oil and gas companies.

Michael Ettlinger, the vice president for economic policy
at the Center for American Progress, a Washington policy group
often aligned with Democrats, called the vote “encouraging.”

“It’s a sign of adult behavior,” he said. “It broke a
philosophical barrier and now we can look at these things.”

Procedural Dispute

Yesterday’s action followed the Senate’s 59-40 vote on June
14 against advancing a similar proposal from Senator Tom Coburn,
an Oklahoma Republican. Democratic leaders, who wanted to assert
their control of the chamber’s proceedings, urged their members
to oppose that proposal in protest of the way Coburn forced a
vote. Yesterday’s vote was free of such procedural issues and
marked a truer test of senators’ position on the ethanol issue.

Coburn and Feinstein harnessed a coalition that includes
anti-hunger groups worried about food prices, taxpayer advocates
who call the ethanol program wasteful and animal agricultural
processors that compete with ethanol producers for feed.

The vote also has broader consequences for tax policy.
Grover Norquist of Americans for Tax Reform, who has persuaded
40 of 47 Republican senators to sign his no-tax-increase pledge,
regards the elimination of a tax break as a tax increase.

Coburn, who drew the support of 32 other Republicans in
yesterday’s vote, has been challenging that view. He contends
that some tax breaks look more like spending programs and should
be eliminated without being paired with a tax cut.

Norquist’s group said that it wouldn’t consider a vote for
the ethanol proposal a violation of the pledge provided that
lawmakers also support a proposal by Senator Jim DeMint, a South
Carolina Republican, that would eliminate the ethanol usage
mandate and the estate tax.

The group reiterated its position after yesterday’s vote.

“As long as taxpayer protection pledge signers that voted
for the Feinstein/Coburn amendment also vote for the DeMint
amendment, they will be in keeping with the pledge they made to
their constituents,” the group’s statement said.